Tuesday, November 26, 2019

China Pig Bubble Bursts, Supply Still Short

Chinese pork prices have dropped about 20 percent in November. Most industry analysts seem to view the decline in pork prices as a temporary market correction, and they expect a moderate rebound because there is still a 15-to-20 mmt deficit in pork supply. Prices stabilized or started to increase again in nearly all provinces last week. An industry survey found that 60 percent of industry people expect a renewed increase in pork prices as preparations of traditional pork products to celebrate the new year begin in southern provinces.

The average carcass price at the Beijing Xinfadi wholesale market on November 24 was down 23 percent from its October 29 peak of 26 yuan per 500g, erasing about half of the 58-percent increase during October. The price is still 135 percent higher than its year-earlier level of 8.5 yuan per 500g.

Chinese news media are thick with propaganda about farmers rebuilding production capacity. Ministry of Agriculture officials at a press conference last week instructed news media to report good news to restore the confidence of hog farmers. A Chinese Academy of Ag Sciences official recited the party line that production has already begun to rebound and the overall meat supply is stable as increases in supply of poultry, beef and lamb and imports have filled in the deficit.

While officials spread the mantra of stability, the situation on the ground suggests an industry still on a knife's edge, with panic-selling and new disease risks tipping the market into a downturn despite a yawning supply gap that consumers are learning to live with.

Most analyses give a shout-out to government policies for reviving hog production, yet pork supplies are still tight. Slaughterhouses are operating at about 15 percent of capacity and some have idled their facilities due to heavy financial losses. Beijing's Xinfadi wholesale market is still receiving about 40 percent fewer hog carcasses weekly than a year ago. Likewise, pork trade volume in four Shanghai wholesale markets is also down 40 percent from a year ago. Last week, MARA officials acknowledged that restoring pork supplies is a time-consuming process and said their objective is to restore pork production capacity to 80 percent of normal by the second half of 2020.

Two analysts revealed that government officials have been informally ordering companies and slaughterhouses to speed up slaughter, stop hoarding pork, release their frozen pork inventories into the market, and refrain from raising prices at the end of the year. "This news spread all over the country," one analyst said. A BRICS analyst said it is unclear how much frozen pork companies are holding. At last week's press conference MARA officials said they were investigating pork inventories.

Indeed, increased sales of frozen pork are cited as another factor in the price drop. Normally, fresh and frozen pork are largely separate markets but frozen pork has been putting downward pressure on all pork prices. Note: these are inventories stored up by companies early in the year when panicked farmers were sending pigs to slaughter en masse--not government reserves.

Analysts say consumption has been dropping in response to high pork prices as consumers and food service establishments learn to cope with high pork prices. Xinfadi market's weekly report says 10 percent or more of carcasses had been returned to suppliers at the end of the day in October even though the number available was low.

Farmers have been raising bigger hogs in response to high prices, but they began to slaughter them in November when they saw prices start to fall (and, after all, they can't keep on growing forever). One analyst remarked that the market couldn't absorb the big hogs. Carcasses are larger than usual, which MARA officials said added "15 kg of meat" per carcass, filling in part of the supply deficit. However, Xinfadi's report remarked that the "big hog" trend produced a surfeit of fatty carcasses that are hard to sell. The fatty carcasses were often the ones sent back to the supplier.

Analysts report that farmers in scattered localities have resumed panic-slaughter of animals over worries about plunging prices and scattered disease outbreaks. Only two ASF outbreaks have been officially reported in November and three were reported in October, but one analyst commented that unconfirmed reports of disease outbreaks have been more numerous. The analyst worried that farmers had become complacent after several months with ASF apparently under control and had become lax in biosecurity measures. Another analyst commented that the onset of cold weather and big differences between day and night temperatures leads to outbreaks of other diseases. Two of the officially-reported ASF outbreaks were found in trucks carrying pigs into Guangxi Province and Yunnan Chongqing, pointing to the persisting risk of spreading the virus around the country.

At last week's press conference a Hong Kong reporter asked MARA officials about rumors of recurrences of ASF in Jiangsu and Shandong Provinces and wanted to know how officials would ensure no new spread of the virus. The officials said they knew about these outbreaks and had confirmed that they were not ASF. They were mixed infections of other diseases which officials said they had dealt with.

Friday, November 22, 2019

China Ag Bank Pumps Funds to Keep Farms Afloat

The Agricultural Development Bank of China (ADBC) has been pumping money into China's agricultural sector by financing most of the grain and cotton marketed this year and lending for poverty alleviation, land improvement, marketing infrastructure, agricultural industry parks, "leading enterprises," and agricultural science and technology. The bank is one more seldom-noticed example of a Chinese economy increasingly propped up by debt.

With downward pressure on many commodity prices, ADBC loans are holding up sagging crop markets. In a press conference last month, the bank's president touted ADBC's role in maintaining food security by announcing that ADBC lent 170.4 billion yuan ($24.3 billion) to finance purchases of 124 million metric tons of grain and oil in the first three quarters of 2019--up 87 percent from last year. The ADBC president acknowledged that the bank financed 75 percent of wheat sales this year and 71 percent of early rice purchases. These shares were up from 49 percent last year. The boom probably reflects the 31 million metric tons of wheat purchased through the minimum price program--the largest total since 2008. Early rice production was down sharply this summer as farmers cut back on double-cropping, but officials still had to support the price with purchases at the minimum price.

The fall grain harvest happens in the fourth quarter, and the bank has announced that it has 160 billion yuan ($22.8 billion) of "money waiting for grain" to finance procurement of this year's fall grain crop. That's slightly more than last year when the bank financed half of fall grain purchases. Five rice-growing provinces have already begun minimum-price purchases of their fall rice crops which news media credit for price rebounds. Minimum-price purchases of medium grain rice are expected to begin in northeastern provinces after an audit of warehouses is complete. Markets are watching carefully to see whether big rice provinces Hunan and Jiangxi launch the program.

There is no longer a formal price support for corn or soybeans, but ADBC finances purchases for government reserves when the market looks weak. There were rumors in October that the government was considering purchasing corn for reserves, but nothing concrete. Officials are probably monitoring downward pressure on corn prices to determine whether they need to intervene as more grain is sold by farmers and demand remains soft due to the decimated pig herd and weak starch production. Chinese soybean prices fell to their lowest point in 5 years last weekend, but China's grain reserve company swooped in to make additional purchases--almost certainly financed by ADBC--to spark a rebound in prices.

The Agricultural Development Bank of China (ADBC) was carved out of the Agricultural Bank of China (ABC) in a 1994 reform that created specialized banks to carry out government policies, thus freeing up ABC and other state-owned banks to focus on commercial-oriented lending. ADBC's primary function historically was to finance the marketing of grain, edible oils, and cotton by state-owned enterprises. (Other policy banks focus on financing infrastructure and foreign trade.) ADBC is financed mainly by selling bonds. ADBC is one of the top three bond-issuers in China with 4.45 trillion yuan in bonds outstanding.

ADBC's outstanding loan balance has been doubling every five years--from 1.2 trillion yuan in 2008 to 2.5 trillion yuan in 2013, and 5.1 trillion yuan at the end of 2018. The ratio of the loan balance to the total value-added of China's agriculture, forestry and fishing has more than doubled from about 35 percent in 2004 to 75 percent in 2018--an indicator that loans have grown at a faster pace than the agricultural sector.
Source: ADBC annual reports and National Bureau of Statistics web site.
Here's another indicator of how ADBC's loan portfolio has grown. In 2005, ADBC's loan balance was about $10 billion less than the U.S. Farm Credit System's $106 billion. The ADBC loan balance surpassed that of FCS in 2008 and has continued soaring over the last decade. By 2018, ADBC's loan balance of $777 billion exceeded the FCS loan balance by 180 percent.
Source: Annual reports of Agricultural Development Bank of China and U.S. Farm Credit System.
ADBC lends mainly to grain trading and processing enterprises to make sure farmers do not have difficulties selling grain or receive IOUs in payment--occurrences that were common in the 1990s. Grain, cotton and oilseed procurement accounted for the biggest chunk of ADBC's portfolio in 2018 with a loan balance of about $265 billion. Poverty alleviation loans are now a close second, with a loan balance of about $192 billion last year. A little less than half the anti-poverty loans are for infrastructure, and they also include lending earmarked to buy grain, oil and cotton in poor regions.

"Agricultural modernization" is the third chunk of loans described in the 2018 annual report, with a smaller balance of about $31 billion. These include loans for marketing system development ($6.5 billion), so-called "dragon head" agricultural business enterprises ($4.7 billion), high-standard farmland projects, support for agricultural industry parks and "protected zones" for key commodities, and agricultural S&T. ADBC has loans to support "new-style" scaled-up farms. ADBC recently announced intentions to lend 50 billion yuan to support hog production over the next three years. ADBC finances transportation of grain from north to south.

Historically, China's banking system has siphoned money out of the countryside via peasants making deposits in postal savings banks and credit cooperatives which then deposit the funds in city-based banks or real estate and industrial investments. ADBC is reversing that tide by sending some of that same money from bond-buyers (probably commercial banks) back to the countryside, but it would be more efficient to develop self-contained credit markets in the countryside. One of ADBC's current initiatives is to jump-start "marketized" lending in the countryside by capitalizing loan guarantee entities run by provincial governments intended to reduce risk of bank lending to private grain traders and processors.

In theory, ADBC's money pipeline to the countryside is one of the few mechanisms to reduce the massive inequality in China. But the system has built-in incentives for corruption--a lot of the money was stolen by corrupt officials and unscrupulous warehouse operators--and one wonders whether the lending is unsustainable. ADBC claims its non-performing loan ratio is only 0.4 percent but it seems unlikely that loans for moldy, poisoned or nonexistent grain, fields producing crops that are falling in price, and apartment complexes for elderly peasants can be paid back. Moreover, the ADBC reflects the Chinese communist tendency to rely on behemoths. ADBC is itself a behemoth and one of its stated strategies is to help other creations of central planners--COFCO, Sinograin, the Supply and Marketing Cooperatives, and a State investment company--to "play a leadership role in the market" and stabilize market expectations.

Monday, November 11, 2019

China Subsidizes Soybean Revitalization

"Imports are cheaper; so why is the government spending 17 billion yuan to subsidize soybean-planting?" was the title of a recent article in No. 1 Business News (Di Yi Caijing). The article didn't really answer the question, but a few calculations show that increase in subsidies paid to increase soybean output this year is almost equal to their purchase price. Moreover, the price is dropping as the market for Chinese soybeans appears to be saturated.

In the article, China's Ministry of Agriculture and Rural Affairs lauded success of the "soybean revitalization plan" ordered up by this year's "Number 1 Document." The Ministry expects this year's soybean output to increase to 17.2 million metric tons (mmt) from last year's 16 mmt. The plan's objective was to reduce reliance on imported soybeans by 1 percentage point in 2020 and another percentage point by 2022. The Ministry projects a slight increase in imports from 83.1 mmt in 2018/19 to 84 mmt in 2019/20, but the Ministry projects a slight decrease in soybean consumption in 2019/20 to ensure that the increased self-sufficiency target is met. (Actually, the Ministry's decrease in soybean consumption of less than 1 percent still seems over-optimistic in view of the large reduction in the number of swine due to African swine fever.)

The marginal subsidy cost of increasing soybean output is even more outrageous. A Ministry official attributed the increase in China's soybean output to soybean producer subsidies of 17 billion yuan (about $2.4 billion) and 80 million yuan (about $11.4 million) in transfer payments made to soybean-producing counties. That works out to nearly 1,000 yuan (about $140) in subsidies per metric ton produced.

At the current average purchase price for soybeans the crop would be worth 58.8 billion yuan, so the 17 billion yuan in subsidies equal 29 percent of the value of this year's soybean crop.

This year's soybean subsidy works out to an average of 1875 yuan ($268) per hectare, 125 yuan per mu, or $109 per acre. The subsidy payment is made only in northeastern provinces, so the national average is much lower than the subsidy levels in the northeast. According to another article, the average soybean subsidy in northeastern provinces averaged more than 300 yuan per mu in 2018 and was as high as 560 yuan/mu in parts of Jilin Province. (It is unclear what soybean subsidies are paid in regions outside the northeast.)

The Ministry of Agriculture and Rural Affairs official said this year's soybean subsidies were increased by 4 billion yuan from last year. That means the Chinese government spent an additional 4 billion yuan to increase soybean output by 1.2 mmt, which represents a subsidy price tag of 3,333 yuan ($476) per additional metric ton. That's 97 percent of the current farm gate price of 3,421 yuan ($489) per metric ton. The average landed value of imported soybeans (before tariffs and taxes) during 2018/19 was 2821 yuan ($408) per metric ton. The cost of imported soybeans would be 3,130 yuan/mt with the 1-percent tariff and 10-percent VAT.

The market for the additional soybeans is weak. Nearly all domestic soybeans are used for food processing, and the National Grain and Oils Information Center estimates that only 2 mmt of domestic Chinese soybeans will be used by crushing plants to make oil and meal in 2019/20. According to one market report last week, the increase in soybeans available is putting downward pressure on prices. The government's grain reserve corporation, Sinograin, has been buying up soybeans to prop up the price, but another report says prices per metric ton have nevertheless fallen about 40 yuan to 60 yuan since new soybeans started coming on the market in Heilongjiang Province. Analysts worry that a commitment to purchase more U.S. soybeans could put further downward pressure on prices.

The futures price for domestic soybeans has been trading at about 5-to-15 percent below year-ago prices. In October last year Sinograin went into the market to buy soybeans when the price was 3800 yuan but the price soon crashed anyway. The average price fell to 3150 yuan in December 2018--a 17-percent decline. The futures price now--in November 2019--is teetering at 3380 yuan, slightly below year-ago prices. Will the price crash again this year?
Closing prices at Dalian commodity exchange. 
No. 1 soybean contract for non-GMO soybeans delivered in northeast China.

Officials also emphasize the importance of diversifying soybean imports. However, China purchased 74 percent of its imported  soybeans from Brazil during 2018/19, up from 48.5 percent in 2016/17--that does not sound like diversification. No. 1 Business News says that China can control trade to ensure a steady supply via foreign investment, cooperation, and other measures. Officials acknowledge that most soybeans are grown on the American continent but say the "one belt one road" initiative can help diversify by promoting production in regions suited for growing soybeans such as Russian, Ukraine, Kazakhstan, and Africa. However, China's soybean imports from belt and road countries were stagnant in 2018/19 and they together supplied less than 1 percent of China's soybean imports.

Saturday, November 9, 2019

Northeast China Attempts Pork Production Recovery

On-the-ground investigations emphasize that northeastern farms have begun to restore hog production after at least half of the region's swine were lost to last year's African swine fever (ASF) virus and panic-selling. The region is still severely short of pigs, but its slaughterhouses are shipping thousands of carcasses to southern regions where production has not rebounded at all. The facts and figures the report cites suggest there has been only marginal progress in restocking farms, and individual farmers who accounted for the bulk of production pre-ASF are mostly still on the sidelines or raising chickens now.

A report from Huatai Futures is based on interviews with farmers, breeding companies, traders and slaughterhouses in northeastern provinces of Liaoning, Jilin, and Heilongjiang--apparently in October 2019. Another online article and an assessment of a drop in hog prices in early November report similar information.
This chart claims to show the percentage loss in hog inventories (blue bars) in 7 districts of 
Liaoning and Jilin Provinces and the percentage recovery of swine production (red bars) in each district. 
The northeastern provinces were the first in China to be hit by ASF in August 2018 and the epidemic peaked last fall and winter. All farms were severely impacted, especially individually-operated farms. In districts of Liaoning and Jilin provinces hog inventories fell to varying degrees--from 50 percent to as much as 80 percent (see chart above). In Liaoning the number of swine held by small, independent farmers is down 60 to 80 percent from last year, while swine held by large-scale farms is down 30 to 50 percent.

Breeding animals were especially vulnerable to ASF. A string of breeding farms operated by a company in Jilin Province's Songyuan district lost 100,000 sows. One large breeding farm shrank from 26,000 head to 4,000 and has since rebuilt its inventory to 5,000 head. Since March this year, many finishing farms have held back female swine to use as sows, a factor that has contributed to the shortage of hogs available for slaughter. In Liaoning, the government will subsidize half of the cost of imported swine breeding stock and 500 yuan of the cost of breeding swine brought in from other provinces.

Instead of going through a 2-year process of expanding breeding herds to supply commercial finishing farms, many farms are taking a shortcut by holding back females from their finishing herds to use as sows. This process reportedly began in March and the first litters are coming on the market.

With few hogs available, slaughterhouses are operating at less than 20 percent of capacity. One company said it is now slaughtering 1,000 head daily, a fifth of its usual volume. A meat company in Jilin Province said it has been slaughtering 500 head per day, less than a third of its 1600-head capacity. A second company in Jilin said its slaughter fell as low as 750 head per day and is now 1300, still well below its usual 2300-head volume (and as high as 5000 head per day during the peak holiday season).
This chart shows daily capacity utilization by designated hog slaughterhouses in China 
during 2018 (blue line) and 2019 (red line). 
These are probably unpublished data from the Ministry of Agriculture and Rural Affairs.
Source: http://cj.zhue.com.cn/xingye/2019/1030/345925.html
Meat companies are offsetting losses from slaughtering expensive hogs by selling frozen meat from inventory. The Jilin company says it loses 30-to-40 yuan on each hog it slaughters, but its three plants have been selling 50 metric tons of frozen meat from storage each month. One company says it has 2,300 metric tons of frozen pork in storage, but another report says inventories of frozen meat are running low. The 30,000 metric tons of national pork reserves released last month nationwide had a minor impact on pork supplies.

Hogs are highly profitable. The cost of fattening pigs is estimated at about 13 yuan per kg, while the price for live hogs was reported to be around 35 yuan/kg (when the survey was conducted). With these profits and a limited supply of piglets available, the price of piglets has soared even faster than the price of finished hogs. One company reported an 1,100-yuan sale price for 15-kg piglets--which works out to 73 yuan per kg. The average piglet price in late October was reported to be 1760 yuan in the northeast and 1860 yuan nationwide. One commentator complained that the high price of piglets prevents individual farmers from re-stocking their farms. Another commentator--who identifies himself as a farmer who "listens to farmers"--complains that big companies are making money selling frozen meat they bought from farmers at cheap prices and forcing independent farmers out of business.

With the price of an additional kilogram of hog weight far exceeding feed costs, farms are fattening hogs to 135 to 140 kg, up from usual slaughter weights of 115-120 kg. Individual farmers are raising even fatter pigs of 150-200 kg. (Traditionally, Chinese slaughter weights have been highest in northeastern provinces because corn is cheapest there.) One slaughter plant said its equipment is not set up to accommodate such large animals.

Farms in the northeast that feel confident of low disease risk are expanding. These include mainly large farms confident in their strong biosecurity measures and newly-built farms in regions that were not hit by ASF. In particular, companies are targeting eastern Liaoning Province where the geography is viewed as favorable to disease control. In contrast, no rebound in production is taking place in places like northern Liaoning and patches of Heilongjiang Province that are still vulnerable to ASF. In southern provinces, it is said that neither companies nor individual farmers are willing to restock their farms because disease risk is still too high.

Individual farmers who used to raise 500 to 1000 hogs at a time have mostly stayed on the sidelines because sporadic outbreaks of ASF continue in some areas. Although officials have not made any official announcements, rumors of "dead pigs" in the northeast early this month raised fears of a renewed outbreak. About 30 to 50 percent of individual farmers have switched to raising poultry.

Consumption of pork is down sharply in the northeast. According to one estimate, pork consumption in Liaoning Province is down 40-to-50 percent from normal years, and down 70 percent in poor regions. A supermarket chain in Liaoning said its pork sales dropped beginning in July and August. Sales are down 40 percent in its Shenyang stores and 50 percent in its Anshan outlets. Chicken sales are up 20 percent and prices have also risen. Increased sales of chicken and beef do not offset the decline in pork sales.

About half of the carcasses produced by the northeast region's slaughterhouses are shipped south, where prices are higher. A Jilin Province meat company says it sends 15-to-20 large trucks packed with carcasses to Guangdong/Guangxi each day.  Hunan/Hubei, and Shanghai/Zhejiang are also destinations. Smaller trucks carry pork to closer markets. Another slaughterhouse says it sends 200-to-300 carcasses a day to Jiangsu Province and sent 260 head to Shandong.

Thousands of miles to the south in a Shanghai market, a pork vendor said he now pays 52 yuan per kilogram for pork, three times the 16 yuan/kg he used to pay. He used to sell 6 or 7 half-carcasses daily, but now he sells only one. He grinds up unsold meat to make dumplings that he sells elsewhere.